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Hospira's Bold Move

The drug delivery outfit's stab at biosimilars is worth some attention, but investors shouldn't assume a major payoff.

Hospira(NYSE:HSP) isn't known for its flashiness -- the company focuses on drug delivery systems, like syringes, cartridges, and infusion pumps. But the firm announced today a move that will inject it into what may become one of the hottest areas in the drug industry. Unfortunately, realizing the deal's full potential won't be easy.

Hospira will work with BIOCEUTICALS, an affiliate of STADA Arzneimittel AG, to develop a biosimilar version of erythropoietin, or EPO. In exchange for $21 million up front and up to an additional $34 million over the next several years, Hospira will get distribution rights in the E.U., excluding Germany. Hospira also has exclusive rights in the U.S. and Canada, where it will be responsible for developing and manufacturing the biosimilar EPO.

Biosimilars have received some press lately, thanks to the Food and Drug Administration's (FDA) marketing approval of Novartis' (NYSE:NVS)Omnitrope, a human growth hormone product. Although the FDA stressed that Omnitrope is not a generic biologic, or biogeneric, the medication will likely play the same role as a generic in the marketplace. The move was significant because, on account of the non-existence of a generic approval process, biologics did not face generic-style competition before the approval of Omnitrope.

For Hospira, the opportunity is notable. Branded EPO is sold in the U.S. and Europe by big companies, namely Amgen(NASDAQ:AMGN) and Johnson & Johnson(NYSE:JNJ). The market for branded EPOs, which are used to treat kidney disease and chemotherapy-induced anemia, is large; in Europe alone, EPOs generate sales of $1.4 billion.

However, a near-term windfall probably is not in the offing. Admittedly, BIOCEUTICALS could receive European regulatory clearance for its EPO as early as 2007, but it's not clear that biosimilar EPO will be a super lucrative business in Europe. Government controls keep branded drug prices in Europe artificially low, so biosimilar EPO likely would have to be offered at bargain-basement levels to grab a lot of sales.

In the U.S., patent rights rule out a biosimilar EPO for now. What's more, it's almost certain that Hospira will face heavy competition in the U.S. from Novartis and others that are likely positioning to launch their own versions of EPO as patents expire soon.

The sales potential for biosimilars makes Hospira's latest move well worth watching. Even so, investors should keep in mind that Hospira's success in the area is no slam dunk.